SOUTHEAST SNAPSHOT, MAY 2010

Nashville Office Market

The Nashville office market demonstrated surprising resilience during 2009, as the year ended with a seemingly uneventful negative net absorption of 31,000 square feet. But for those in the market day-to-day, the year was quite volatile. Over the first six months of the year, the area’s office market posted a worrisome negative net absorption of 529,000 square feet. However, beginning late summer the market activity began to improve and strongly reversed, posting 498,000 square feet of positive office absorption for the next two quarters — 331,000 square feet of which occurred in the fourth quarter. It is worth noting that this negative absorption was the first time Nashville finished a year “in the red” since 2001.

While Nashville fared better than most comparable office markets, the year-end vacancy rate stood at 14.6 percent — up more than three points from 11.5 percent at the start of 2009.

The tale of two halves provides room for optimism, but one can’t ignore the continuing challenges. As the economy struggles to gain traction, the big question looming for the office sector is: How soon will companies begin to hire more workers?

The murky employment picture makes predicting a return to overall market growth difficult. Many pundits forecast a jobless recovery as employers first hire back workers that have been furloughed. Consequently, even though Nashville’s office market rebounded strongly at the end of 2009, we expect the office market to show moderate growth and improvement. Any substantial improvement in the near term depends on Nashville’s ability to draw new companies to the area. Despite the city’s substantial assets and proven track record in attracting corporations, such relocations face many hurdles as companies wrestle with confidence in the economy’s sustained recovery.

A spate of new construction added to the market’s vacancy rate. The central business district (CBD) moved a step forward in quality of office product and a wealth of inventory when Barry Real Estate Companies opened The Pinnacle last October. This $105 million building, LEED-Silver certified tower brought 520,000 square feet of prime space into the downtown market. Law firm Bass, Berry & Sims now occupies the top eight floors of the 29-story building. Pinnacle Financial Partners moved into another 65,000 square feet, and another tenant took 11,000 square feet. Both Bass, Berry & Sims and Pinnacle Financial moved from other downtown locations, which boosted the area’s vacancy rate to start the year at 23.1 percent. The vacancy rate for Class A space is even higher now at 27.1 percent, so it will take some time for the CBD to stabilize to more traditional vacancy levels.

In the suburban markets, new construction added another 535,000 square feet last year, with an additional 40,000 square feet added during the first quarter of 2010. It took the strong second-half absorption for the suburban markets to post positive absorption of 47,000 square feet. Vacancy rates in the suburban areas stood at 11.9 percent entering 2010, up from 10.1 percent at the start of 2009.

Much of the new suburban space was added in the Cool Springs submarket, as Highwoods Properties added a 156,000 to its office park with Cool Springs IV. Highwoods also finished Cool Springs V, a 263,000-square-foot build-to-suit for Healthways.

After temporarily halting construction on the 164,000-square-foot One Greenway Centre, financially troubled Crescent Resources completed the building, located at one Carothers Crossing, late last year.

Despite the influx of this new space in the Cool Springs/Franklin submarket, the vacancy rate stands at a manageable 11.8 percent. The area remains attractive for office users with hotels, restaurants, shopping, and quality space. We expect the Cool Springs submarket to continue to be a leader in the office sector’s recovery.

Brentwood’s location positions the submarket as a favorite spot for corporate office users. Maryland Farms, in particular, offers quality office space within the submarket. With no new construction during the past two years and none on the horizon, the area has a vacancy rate of 10.5 percent.

By and large, tenants should remain in the driver’s seat over the near term when negotiating their leases albeit not at the level of concessions most tenants expect. Rental rates may decrease mildly in some of the softer submarkets but should begin to level out across Nashville’s office market as the year progresses. It may possibly start increasing if vacancy levels begin to contract. New construction will be limited to build-to-suits with creditworthy tenants over the balance of the year.

The combination of stabilizing rental rates and limited new construction should allow the office sector to whittle down the vacancy rate and provide momentum heading into 2011. The prospects for Nashville’s office market look good and if, perhaps, just one additional major company decides to relocate to Nashville during 2010, that momentum may shift into high gear sooner rather than later.

— Robert W. Lowe Jr., CCIM, specializes in office sales, leasing, and investment. He serves on the Board of Directors for Cassidy Turley and is a principal in Cassidy Turley’s regional office in Nashville.

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